Tobacco Taxes: Fool’s Gold for Foolish Politicians

David Williams

August 14, 2013

Raising tobacco taxes is popular in the United States and abroad (see TPA’s work on international tax issues here and here).  State and national governments think that they can raise revenue and discourage people from smoking with higher tobacco taxes.  In reality what happens is that the revenue never materializes and consumers shift their smoking behavior from legal tobacco products to illegal products.

As the title suggests, the promised revenue from increased tobacco taxes is nothing more than Fool’s Gold.  The Minnesota State News pointed out that “Since 2003 there have been 57 cigarette tax increases across the nation and 68% of them have failed to meet projected revenues. In 2006, New Jersey raised cigarette taxes with the hope of pulling in $30 million in extra revenue each year.  Not only did the tax hike fail to bring in extra revenue, but the state actually collected $20 million less in cigarette sales.”  Yet, every year numerous states offer legislation to raise tobacco taxes.  One of the highest profile states this past year was Minnesota. After a protracted battle Minnesota raised it’s tobacco tax by $1.60 per peck of cigarettes, which brings the total to $2.83 per pack, giving Minnesota the 6th highest tax on cigarettes.

A new study by the National Taxpayers Union Foundation (NTUF) shows that Minnesota may have just made a big mistake.  According to NTUF:

Cigarette tax hikes lead to different types of tax increases, fail to meet revenue projections.

  • In nearly 70 percent of cases between 2001 and 2011, tobacco tax increases were followed by other tax hikes!
  • Between fiscal years 2007 and 2011, 25 of 37 tobacco tax increases were followed by additional tax hikes.
  • When accounting for findings of a past study conducted by National Taxpayers Union, a total of 66 out of 96 tobacco tax increases between fiscal years 2001 and 2011 were followed by other tax hikes during the next two years.
  • Revenue projections were met in only 29 of 101 cases where cigarette/tobacco taxes were increased between 2001 and 2011. This means there is a 70 percent chance that a revenue estimate will be missed.”

The Daily Caller Foundation further emphasized that point when they reported in June that, “State officials in Illinois recently admitted that last June’s $1 per pack tax increase on cigarettes has turned out to be 39 percent less than initial projections, leaving a shortfall of $130 million.”

Not only is there not the projected revenue, tobacco taxes may not stop people from smoking as people look to illicit means to smoke.  According to the Troy Record, “’The sale of black-market, untaxed cigarettes has resulted in the loss of hundreds of millions of dollars in revenue to the state, robbing state health care programs designed to help children,’ Avella said in announcing his bill to create a smuggling task force this week. ‘According to the Tax Foundation, a Washington D.C., business-oriented tax research organization, approximately 60.9 percentage of cigarettes sold in New York were smuggled in from other states. In addition, a study conducted by John Dunham & Associates on behalf of New York Association of Convenience Stores found that state taxes were not collected on one out of every two packs of cigarettes consumed in New York State in 2011.’”

Instead of looking for more revenues by raising taxes and hurting consumers and taxpayers, states need to cut spending and increase revenue by lowering tax rates and expanding their tax base.

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